Silvercorp: U.S. court gives short-sellers shield in ruling

A U.S. court has emboldened short-sellers by ruling that their allegations against a Canadian miner are essentially protected on freedom of speech grounds.

The court recognizes that this result could be viewed as a green light to those who could use this kind of vehicle to manipulate the market

The decision could make it tougher for targeted companies to fight back against online short attacks. It is a particular issue for Chinese companies on North American exchanges, which have come under heavy scrutiny from the shorts since the Sino-Forest Corp. scandal last year.

Late last week, Madame Justice Carol Edmead of the New York State Supreme Court dismissed a big defamation suit filed by Silvercorp Metals Inc. against a group of U.S. short-sellers. She ruled the shorts were making statements of opinion about Silvercorp (rather than fact), which are protected by constitutional rights.

In doing so, she acknowledged the potential implication of the ruling.

“The court recognizes that this result could be viewed as a green light to those who could use this kind of vehicle to manipulate the market. However, the court is constrained to conclude that the challenged statements fail to support a claim for defamation,” Judge Edmead wrote.

Vancouver-based Silvercorp, which operates in China, was one of the most high-profile companies targeted by short-sellers last year. Anonymous websites Alfredlittle.com and Chinastockwatch.com posted reports within days of each other, both suggesting the reported production and resource figures from the company’s Ying mine were too good to be true.

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Silvercorp fought back. It figured out who was behind the anonymous sites and named them as defendants in a defamation and stock-manipulation suit. The company is disappointed it was dismissed, and has already filed an appeal.

The ruling demonstrates the differences between the Canadian and U.S. legal systems. In Canada, expressions of opinion do not get the same protections, experts said.

“The line between protected speech and actionable speech in the United States is blurred by this [decision], I think,” said Howard Shapray, a Vancouver-based attorney who acted for Silvercorp on the defamation suit.

“It’s a brighter line in Canada, and we obviously don’t agree with the conclusion or the interpretation that she’s put on it,” Mr. Shapray said.

Jon Carnes, the formerly-anonymous investor behind the “Alfred Little” site that Silvercorp outed, could not be happier about Justice Edmead’s decision. He is confident that other suits filed against him by Chinese firms will also get tossed out.

“I think her ruling is a clear signal to the Chinese companies that suing bloggers and authors of critical reports is no longer a viable option for them,” he said in an interview.

As Silvercorp pursues its appeal, its fight with the short sellers could become even nastier.

Mr. Carnes promised to publish fresh allegations against the company this week, hinting that they may revolve around recent statements that he believes are misleading. He is also considering a legal action against Silvercorp.

Silvercorp set up a website last year to refute all of the allegations that were made against it, and believes they have all been proven false. The company’s board also commissioned a report from KPMG that found no faults with its finances.

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